The Taxation of Land

Thomas J. Reynolds

[An excerpt from a report, Facing the Tax Problem funded by The Twentieth Century Fund and published in 1937. C. Lowell Harriss and William Vickrey also contributed to this report on other areas of taxation policy. The section on "The Taxation of Land" was written by Thomas J. Reynolds, a member of the research staff.]

In Book Two of the report, Facing the Tax Problem, the authors state that the U.S. tax system serves both primary and secondary aims. Revenue raising and social control are the principal goals of a tax system, providing the broad framework for discussions of tax reform. Secondary aims include tax justice, revenue stability, ease of administration, tax consciousness, and intergovernmental coordination. Using these categories, the authors evaluate the U.S. tax system of 1937.

SPECIAL TAXATION OF LAND

Special taxes on land have been urged on the ground that private ownership of land or its proceeds is partly or wholly undesirable from a social point of view. To some extent the charge of undesirability is based on grounds of economic influences. /24/ Another argument, however, holds that private ownership of land has no moral justification, since land is the result of no man's work or sacrifice and its value is derived from community growth and action.

The Single Tax and the Graded Tax

The extreme advocates of the single tax propose to finance all government expenditures by a tax on land rent, at a rate as high as 100 per cent, if necessary. Considerable debate over this issue has arisen from time to time. At the moment the tax gives no indication of being an important political issue in the United States except possibly in a few states where it is linked with other measures.

Variants of the single-tax doctrine call for the taxation of improvements on and in the land, but at a rate lower than that on land. For some years Pittsburgh has levied its real estate tax in this manner. /25/ On the whole, even this graded tax has been given little consideration. The recent demand for a reduction of real estate rates has not differentiated between land and improvements.

The chief difficulty with proposals for the single tax and the graded tax, from the point of view of justice, is the damage that would occur to innocently acquired vested interests. /26/ One's judgment on the justice or injustice of those proposals will depend chiefly on the importance that one attaches both to these vested interests and to the distinction between destroying them quickly and destroying them over one or more generations.

The Land Increment Tax

Instead of taxing existing land rent at an especially heavy rate, and disturbing innocently acquired vested interests, /27/ some students favor a special tax on increases in land values. Recently the tax has been proposed as a substitute for special assessments. /28/

It is not always clear whether the tax would apply only to future increases. Suppose that at the time the tax is enacted a landowner holds a parcel of land worth $15,000, which he had purchased many years before at $10,000. If, after the tax has been enacted, he sells the land for $18,000, is he to be taxed on $8,000 or $3,000? If he is to be taxed only on $3 ,000, and other landowners are to be treated similarly, it is impossible to avoid the difficult administrative task of compiling a special inventory of all land as of the date of enactment.

A variant of this plan requires valuation of all land as of some prior year when values in general were higher than in the year of enactment. This plan is advanced when the year of enactment coincides with a depression in real estate values. The burden on the taxpayer would be lightened, but the difficulty of a land inventory is increased if the valuation must be as of some date in the past.

Many land increments are part of a development that causes land decrements in other areas. Thus, when a subway opens up new territory, it relieves pressure on other parts of the city and tends to cause a fall of rental values there. When increments and decrements occur at approximately the same time but affect different parcels of land -- as in the subway example --, the only way to allow the one to offset the other is to give to the unfortunate landowner the proceeds of the tax levied on the fortunate one. Otherwise, the question arises whether it will be consistent to allow decrements to offset increments when both occur in the same parcel of land.

If land that was worth $15,000 when the tax was enacted drops to $10,000 a few years later and then rises to $18,000 a few years later still, how much of the increment is to be taxed? If the land is sold at the $10,000 level and sold again at the $18,000 level, a tax on $8,000 -- not on $3,000 -- may seem reasonable. If the land is not sold at the $10,000 level, but is sold at the $18,000 level, application of the special tax on $3,000 -- not on $8,000 -- may seem reasonable. Can any reason be given, however, for making allowance, in effect, for the decrement in the latter case and not in the former? To make the difference in treatment depend on a change in ownership is to make the tax a somewhat personal one -- that is, the amount of the tax becomes dependent on personal circumstances instead of solely on the fact that a land value increment has occurred.

Consistent treatment of land decrements is more important now than it was in the early days of the country when the increments were destined to be so much larger than the decrements.

The problems just noticed do not necessarily lead to a condemnation of land increment taxation, but they suggest that proposals for it should be made so definite that the particular philosophy of tax justice that it represents can be identified.

A comprehensive and effective excess profits tax might be made to reach increments in land -- at least, increments that were much above a normal interest rate. The burden might not be so heavy as most advocates of increment taxation would desire, but, if the excess profits tax succeeded in taking as much as 60 per cent or 70 per cent of all annual increments above 5 per cent or 6 per cent, little need would be felt for a special increment tax. Another substitute for increment taxation that has been proposed is a super-tax to be applied to the entire value of the land when an increase has occurred. /29/

Because the property tax is so heavy, and because the amount levied on any one piece of property depends so much on the exercise of the official's judgment, the tax carries the constant threat of a more crushing unfairness to a greater number of people than any other tax in the country. The meticulous detail with which the income tax laws, rulings, and court decisions provide for calculation of the precise tax due, to the cent, contrasts strongly with the amount of discretion left to the assessor under the real estate tax. The latter tax involves a far larger sum in the aggregate, and it is relatively devoid of standards whereby taxpayer and tax collector can check each other's computations.

Proposals have been made to change the base of the property tax from capital value to income, partly in the hope that the assessor can do a fairer job if he has merely to estimate the income for the year just past. The income basis is employed in Great Britain for the local "rates," or property tax, but specialists in real estate taxation do not agree on the extent to which it would reduce discrimination in this country. A gross income base, or gross earnings base, has been substituted by a few states for the capital value tax on certain public service corporations. Also, New Hampshire, Ohio, and Tennessee use income rather than capital value for certain intangibles. Otherwise, the income base, gross or net, for the property tax has made no headway in the United States.

Notes

/23/ See Note 3, War Profits Taxation, p. 556.

/24/ See pp. 150-52.

/25/ See p. 152.

/26/ See pp. 249-54.

/27/ See pp. 250-251

/28/ Spengler, "The Increment Tax versus Special Assessments," Bulletin of the National Tax Association, XX, No. 9 (June 1935), 258- 61; XXI, No. 1 (October 1935), 14-17; XXI, No. 6 (March 1936), 163- 67; and XXI, No. 8 (May 1936), 240-44.

/29/ See Seligman, Studies in Public Finance, pp. 272-77